Shifting NZ's anti-money laundering focus to an outcomes oriented one and away from a box ticking approach would boost ability to detect, prosecute & prevent serious crime, expert says

By Gareth Vaughan

The Government appears to be missing an opportunity to move the focus from an outputs-oriented, or box ticking approach, to an outcomes-oriented focus as it expands New Zealand's anti-money laundering laws, says an anti-money laundering expert.

Ron Pol, a former lawyer who is completing a PhD in anti-money laundering, raises this concern in his submissions on the Government's proposals for so-called phase two of the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act, which will see the Act extended to real estate agents, lawyers and accountants.

In November Justice Minister Amy Adams said extending the AML/CFT Act could cost 'mums and dads' $1.6 billion over 10 years. Nonetheless in December Adams said the Government planned to introduce the AML/CFT Amendment Bill to Parliament early this year and have it passed by mid-2017. She said extending the AML/CFT Act has the potential to disrupt up to $1.7 billion in fraud and drug crime over the next decade.

"This will mean less crime and fewer victims. Estimates also suggest it may prevent up to $5 billion in broader criminal activity and reduce about $800 million in social harm related to the illegal drug trade. The reforms will also protect and help New Zealand live up to its reputation as being corruption free and a good place to do business. They will bring us into line with international standards, and help prevent New Zealand becoming a target for overseas money launderers and terrorist financers," Adams said.

The Government is now analysing submissions.

Pol questions whether the primary objective of the AML/CFT Act extension is to meet NZ's international obligations, or to materially and substantially improve this country's ability to detect, prosecute and prevent serious crime. He wants emphasis on the latter.

'A beyond compliance approach'

Pol argues for a move away from cumbersome and costly compliance activities that those already supervised under the AML/CFT Act sometimes see as "compliance for the sake of compliance", to a beyond compliance approach that "consciously, consistently and inexorably focuses on materially, substantially and demonstrably improving New Zealand's capacity to detect, prosecute and prevent serious crime." Such an approach would demonstrate the value of AML/CFT controls where currently many entities forced to comply with the laws only see cost.

"There is a world of difference between the old outputs-oriented approach of making more rules, and the modern outcomes-oriented focus on rules that work, in this case, by substantially (and demonstrably) improving New Zealand’s capacity to detect, prosecute and prevent serious crime and terrorism," Pol says. "The evaluation draft suggests that government has decided only marginally to improve New Zealand’s capacity to detect and prevent serious crime, which seems a bit odd."

The government's proposals don’t address fundamental policy issues facing policymakers globally, Pol argues. Rather, they merely continue the old incremental approach of filling gaps and adding reporting entities seen by parliamentarians elsewhere in the world as no longer appropriate.

"The current system’s lack of effectiveness prompted a Canadian Senate committee to say that 'the time for examination of fundamental issues has arrived'," Pol says.

"Not so, here, it seems. The result is that the phase two extension should bring New Zealand into line with international standards, by old-school output measures proven to be ineffective. From a contemporary outcomes perspective, however, the proposals will likely make a small but not significant difference to New Zealand’s ability to substantially and demonstrably improve its capacity to detect, prosecute and prevent serious crime."

"That would be unfortunate. Not just for the obvious reason, that many criminals might continue operating, just within a different set of displacement gaps. Nor even because it offers up New Zealand as a case study for academics studying policy effectiveness gaps."

The 2013 Canadian Senate report Pol cites notes that according to the United Nations, money laundering is “any act or attempted act to disguise the source of money or assets derived from criminal activity.” The annual value of global money laundering is estimated by the UN to be between US$800 billion and US$2 trillion, while money laundering in Canada in 2011 was estimated to be between C$5 billion and C$15 billion.

A NZ Herald report last year, based on information obtained under the Official Information Act, details police estimates of $1.6 billion of locally-generated dirty money, mostly from drug dealers, and fraudsters being laundered annually. However, if tax evasion and dirty money from overseas is included, plus money laundered through New Zealand shell companies and trusts, the figure's likely to be much higher than this.

An opportunity for NZ to lead international change

Pol also says some "compelling" crime prevention outcome measures "curiously" missing from official documents show New Zealand already fares significantly better than many other countries. Data in his unpublished thesis illustrates New Zealand leads a number of countries against whom we traditionally compare ourselves, in some cases by a considerable margin, Pol says. His thesis is a political science PhD focused on policy effectiveness and outcomes, showing new evidence illustrating how lawyers, accountants and real estate agents "have been used to facilitate criminal financial transactions since at least 1992."

The official documents, meanwhile, cite output-oriented metrics.

Pol suggests there's an opportunity for New Zealand to lead change within the Financial Action Task Force (FATF), the global AML regulatory body, and help other countries unlock billions of dollars worth of criminal assets from which this country could benefit "from a share of those forfeitures."

"Rather than just follow FATF rules, New Zealand has an opportunity to lead change within FATF itself, and which could potentially lead to changes that allow FATF’s new ‘effectiveness’ rules to actually meet their intended results, globally. Analysis of the new effectiveness framework, and from the 26 mutual evaluations conducted to date suggest considerable untapped opportunity to lead such change. Each of these opportunities is usefully complemented by New Zealand’s recent top-equal ranking in the corruption-perception stakes," says Pol.

With a 'mechanistic application' of AML/CFT 'the model of supervision hardly matters'

The Government plans to retain the existing anti-money laundering supervision model, which features three supervisors being the Reserve Bank, the Financial Markets Authority, and the Department of Internal Affairs (DIA). The DIA will take on supervision for compliance by real estate agents, lawyers, conveyancers, accountants and businesses that trade in high value goods such as jewellery, precious metals, precious stones, watches, motor vehicles, boats, art and antiquities.

Alternatives floated in the Ministry of Justice's consultation paper last year were moving to a sole supervisory model along the lines of Australia's AUSTRAC, or to a multi-agency model like the UK with some professions supervising themselves.

Pol argues that if New Zealand sticks to a "mechanistic application" of FATF recommendations and a standard education/partnering methodology, the model of supervision hardly matters.

"In relation to the ability materially and substantially to improve New Zealand's capacity to detect, prosecute and prevent serious crime, any model is likely to prove about as effective as currently evident in jurisdictions with a single supervisor model as in Australia, as those with a multi-agency model as in the UK. That is, not very," Pol says.

"If, however, New Zealand chooses to implement phase two with policy effectiveness its core, the single supervisor model is likely to best complement and enhance New Zealand's capacity to detect, prosecute and prevent serious crime."

Pol's submissions can be seen here, here and here.

Below is the summary of recommendations from the Canadian Senate report

The Desired Structure and Performance

1. The federal government establish a supervisory body, led by the Department of Finance, with a dual mandate:

 to develop and share strategies and priorities for combatting money laundering and terrorist financing in Canada; and

 to ensure that Canada implements any recommendations by the Financial Action Task Force on Money Laundering that are appropriate to Canadian circumstances.

This supervisory body should be comprised of representatives of federal interdepartmental working groups and other relevant bodies involved in combatting money laundering and terrorist financing. (p. 9)

2. The federal government require the supervisory body recommended earlier to report to Parliament annually, through the Minister of Finance, the following aspects of Canada’s anti-money laundering and anti-terrorist financing regime:

 the number of investigations, prosecutions and convictions;

 the amount seized in relation to investigations, prosecutions and convictions;

 the extent to which case disclosures by the Financial Transactions and Reports Analysis Centre of Canada were used in these investigations, prosecutions and convictions; and

 total expenditures by each federal department and agency in combatting money laundering and terrorist financing. (p. 10-11)

3. The federal government ensure that, every five years, an independent performance review of Canada’s anti-money laundering and anti-terrorist financing regime, and its objectives, occurs. The review could be similar to the 10-year external review of the regime conducted in 2010, and could be undertaken by the Office of the Auditor General of Canada. The first independent performance review should occur no later than 2014. (p. 11)

4. The federal government consider the feasibility of establishing a fund, to be managed by the supervisory body recommended earlier, into which forfeited proceeds of money laundering and terrorist financing could be placed. These amounts could supplement resources allocated to investigating and prosecuting money laundering and terrorist financing activities. The government should ensure that implementation of this recommendation does not preclude victims from collecting damages awarded to them by a court of law in a suit brought under the Justice for Victims of Terrorism Act. (p. 12)

5. The federal government ensure that the Financial Transactions and Reports Analysis Centre of Canada and the Royal Canadian Mounted Police employ specialists in financial crimes, and provide them with ongoing training to ensure that their skills evolve as technological advancements occur. (p. 12)

The Appropriate Balance Between the Sharing of Information and the Protection of Personal Information

6. The federal government require the Royal Canadian Mounted Police, the Canadian Security and Intelligence Service, the Canada Border Services Agency and the Canada Revenue Agency to provide quarterly feedback to the Financial Transactions and Reports Analysis Centre of Canada regarding the manner in which they use case disclosures and how those disclosures could be improved. (p.14)

7. The federal government permit the Financial Transactions and Reports Analysis Centre of Canada to provide case disclosures in relation to offences under the Criminal Code or other Canadian legislation. (p. 14)

8. The federal government develop a mechanism by which the Royal Canadian Mounted Police, the Canadian Security and Intelligence Service, the Canada Border Services Agency and the Canada Revenue Agency could directly access the Financial Transactions and Reports Analysis Centre of Canada’s database. The Privacy Commissioner of Canada should be involved in developing guidelines for access. (p. 14)

9. The federal government and the Financial Transactions and Reports Analysis Centre of Canada, in consultation with entities required to report under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations, annually review ways in which:

 the compliance burden on reporting entities could be minimized; and

 the utility of reports submitted by reporting entities could be optimized. (p. 15)

10. The Financial Transactions and Reports Analysis Centre of Canada provide entities required to report under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations with:

 on a quarterly basis and specific to each entity, feedback on the usefulness of its reports;

 on a quarterly basis and specific to each sector, information about trends in money laundering and terrorist financing activities; and

 tools, resources and other ongoing support designed to enhance the training of employees of reporting entities in relation to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its obligations. (pp. 15-16) viii

11. The Financial Transactions and Report Analysis Centre of Canada review its guidelines in relation to the period in which reports must be submitted to it by entities required to report under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations. The goal of the review should be to ensure that, to the greatest extent possible, reports are submitted in “real time”. (p. 16)

12. The federal government, notwithstanding the recently proposed changes to Canada’s Witness Protection Program Act, ensure that the safety of witnesses and other persons who assist in the investigation and prosecution of money laundering and/or terrorist financing activities is protected. (p. 16)

13. The federal government establish a mechanism by which employees of entities required to report under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations, and other individuals, could anonymously notify the Financial Transactions and Reports Analysis Centre of Canada about:

 failures to comply with the requirements of the Act; and

 individuals or entities possibly complicit in money laundering and/or terrorist financing. (p. 17)

The Optimal Scope and Focus

14. The federal government enhance Canada’s existing anti-money laundering and anti-terrorist financing regime by placing additional emphasis on:

 the strategic collection of information; and

 risk-based analysis and reporting. (p. 19)

15. The federal government review, on an ongoing basis, the entities required to report under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations to ensure the inclusion of sectors where cash payments exceeding the current $10,000 threshold are made. (p. 19)

16. The federal government eliminate the current $10,000 reporting threshold in relation to international electronic funds transfers. (p. 20)

17. The federal government review annually, and update as required, the definition of “monetary instruments” in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act in order to ensure that it reflects new payment methods and technological changes. (p. 20)

18. The federal government, in consultation with the proposed Financial Literacy Leader, develop a public awareness program about Canada’s anti-money laundering and anti-terrorist financing regime, and about actions that individuals and businesses can take to combat money laundering and terrorist financing. (p. 21)

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